There are many different kinds of retirement accounts, and when people get divorced, there are just about as many different ways to divide them. Knowing the pitfalls can be beneficial for a fair resolution.

South Carolina is an “equitable distribution” state. This means that when people divorce, property acquired during the marriage will generally be considered “martial property” and subject to division between the spouses. Equitable simply mean “fair”, not 50-50. Retirement accounts are property and, as such, are also subject to a fair, equitable, division in a divorce proceeding.

If a person starts contributing to a retirement account during their marriage, generally the entire account is subject to equitable division. But sometimes this is not so, such as when the retirement account is established prior to the marriage and continues through the duration of the marriage.

If this is in fact the case, it is very possible that there is a “premarital” component to the retirement plan that will not be subject to division, but will remain the separate, non marital property of the account holder. Correctly calculating this “premarital” component is important.

Since most 401k’s are mutual funds, there are several ways to compute the non marital portion. Remember, passive gain on the non marital portion is also non marital property, so the easiest way to calculate this portion is to simply average the rate of return of all accounts and sub accounts, and apply this rate of return to the pre marital balance.

A more complicated, expensive, and slightly more accurate method is to calculate the rate of growth of each individual account and sub account within the 401k and then apply these rates of growth to the pre-marital portion.

Finally, the easiest way is to simply subtract the pre-marital portion from the total account balance and then divide the remainder equitably. This will cause the account holder to loose all passive gain on the pre-marital portion and is not generally recommended, but it is an option that can be considered during settlement negotiations. 

Pensions are divided similarly but use a different process called the “coverture fraction”.  The coverture fraction is the length of time the account holder contributed to the pension during the marriage divided by the total number of months the account holder contributed to the pension. For example, if the parties were married for 10 years, and the account holder had been contributing to the pension for 20 years, the coverture fraction is 10/20 or 50%. This means that 50% of the pension is marital and subject to equitable division and the spouse will get a check representing 25% of the monthly pension check. Settlyd provides a tool for a quick and easy coverture calculation.

Finally, in order to properly divide a 401k or Pension, a Qualified Domestic Relations Order (QDRO) must be prepared, signed by the Family Court Judge and then served on the retirement plan. Without a QDRO taxes and penalties will be owed by the participant for early withdraw.